Question

•Assume that the Finance discipline is considering a new major: The Finance of Collectables and is working out the NPV of introducing this major.

–Should the following be included in the NPV calculation?

•Part of the cost of running the Vice Chancellor’s Office?

•A University charge of 40% of revenue for the cost of services such as provision of classrooms.

•A $1 million per year charge to help recover the cost of building H70.

–Should the Finance discipline consider cannibalisation in its analysis?

Note: We will have discussion questions like this in class most weeks. We hope that you will participate in the discussion. There are no set answers and therefore no solutions will be provided. You must supply the answers through your preparation and discussion.

Answer 1

• Part of the cost of running the Vice Chancellor's office - If it is dependent on number of departments then yes we will include that
• University charge of 40% of revenue for cost of services will be included : Because this cost will increase when new discipline is introduced.
• - 1 million dollar charge for building H70- of that building is for whole college/university then it will be distributed amongst the disciplines. This is subjective and will depend upon more data related to building H70.

EXAMPLE: One should consider cannibalization in NPV analysis. For e.g. you are opening a cafe with a bookstore already in place. It will increase the bookstore sales by 30%. But alone cafe has negative NPV. So if combined project has say NPV of $ 130,900 and cafe alone has value of - 57000, so together we get NPV of ( 130,900- 57000)= $73900